EKIP– Expert Club for Economics and Politics A Different Opinion
Everyone knows about the record government spending, but the result is not in reality. Over the past 5 years, the political elite has successfully recreated the dream environment described in more than one or two generations of economics textbooks by implementing record-high fiscal and monetary stimuli. However, the positive results are not just late, they remain a distant dream in a stagnant reality. So – where are we going wrong?
The idea behind fiscal multipliers is simple (Figure 1) [*] . As soon as the total income in the economy is formed, the government seizes some of the money in the private sector (first stage), then directs these funds (or what is left after the costs of their administration) to a number of social programs or investment projects. After some time, sometimes quarters, this money is returned back to the real sector (second stage) in the form of pensions, construction of highways or salaries in the public sector, etc. The private sector, in turn, begins to consume some of the received resource (third stage). Equipment is ordered, salaries are paid. These salaries are materialized by people in goods and services, or in short - money begins to multiply. Hence the concept of multiplier.
Figure 1. What is “fiscal multiplication”?
This whole process is so logical (no argument here) that usually, when we get into econometric models with multiple equations, we miss the big picture – the government takes (say) 30% of your money through taxes and fees, then pays its expenses and returns 20% to you in another form (such as pensions) in the expectation that you will start spending it under the pretext that you will become richer. Sounds great. But let's see what happens if we remove the government's role, which is precisely the second stage in Figure 1.
Figure 2. Multiplication exists even without state intervention!
What is important to note about this second model is that despite the elimination of public spending, the remaining stages are almost identical. The only difference is that in this case, people have 100% of the total income in the economy, since they do not pay taxes. But the stage of money multiplication itself is identical - we receive income with which we purchase a set of goods and services (for example, ice cream). Thus, the ice cream manufacturer receives new income, pays new wages, which go to new consumption, etc. However, it is extremely important in this case that the time during which the money is directed to and remains in the public sector is not wasted.
In other words, there are only two arguments in favor of fiscal multipliers. The first assumes that the public sector is strictly more efficient than the private sector, achieving a higher return on the funds seized despite the time that is lost while these funds are sitting in the state apparatus. You have probably already guessed that this is unlikely. The second argument concerns the so-called smoothing of the business cycle, namely that the government spends more during a downturn and cuts spending during an upturn to prevent severe recessions and overheating of the economy within 1 business cycle. As an idea, it is great, as an implementation - tragic. Practice shows that spending during a crisis is too expensive (since in today's financial system spending is carried out through debt financing), and fiscal consolidation during an upturn has often been associated with political suicide.
It can be seen that even without going into explanatory reasoning about the crowding out effect [1] of government spending, simple logic casts a shadow over the meaning of government spending as a driver of economic activity.
But ultimately, what matters is what the real data shows, not theoretical designs.
The results are quite expected. An OECD study indicates that the average size of the expenditure fiscal multipliers among OECD member countries is 0.5 for the period 2009-2010 [2]. Therefore, with an increase in government spending by 1%, GDP will increase by 0.5%. Considering that government spending is a component of GDP, it turns out that the net effect is negative, since the state apparatus takes a unit of resource, and 0.5 units are returned to the economy during the first period of time. In this case, this period is 1 year after the expenditure is made, i.e. before that there is also a process of collecting taxes and fees.
The size of multipliers in both advanced and emerging economies depends on various factors, such as savings and import flows, as well as the response of monetary policy. However, there are some patterns, such as the tendency for fiscal multipliers to be even lower in small markets than in advanced economies (such as those in the OECD group) [3].
The results mentioned so far are far from exceptions. An IMF study summarizes the results of 18 empirical tests of fiscal multipliers (both expenditure and revenue), and in 17 of them the multipliers for almost all countries and regions are below unity in the first year, and in some places they are even negative [4]. In fact, the only exceptions are the United States (in 7 studies), Germany (in 1 study) and Japan (in 1 study), but under strictly defined conditions.
What is happening in Bulgaria?
To date, only two estimates of the size of fiscal multipliers in the country have been prepared, or at least those officially published by the BNB and the IMF. [5] The IMF indicates that the revenue fiscal multiplier (tax cuts) in Bulgaria is 0.32 in the first year for the period 2003-2011, and the expenditure multiplier (government spending) is 0.31 for the same period.
BNB experts obtain similar results. An increase in government spending by 1% leads to an increase in GDP of no more than 0.4% in the first period (i.e., the expenditure multiplier is 0.4). The results for the revenue multiplier are contradictory, but vary between 0.0 and 0.3. The BNB's conclusion is categorical: "in our country, fiscal multipliers are very low, which means that with a large fiscal impulse, the effect on economic growth is insignificant. The reason probably lies in a large outflow of government resources in the direction of product imports (money exports) and a high sensitivity of interest rates in the private sector to government spending.
Conclusion
The topic of the effectiveness of fiscal multipliers causes extremely heated debates among the academic and, of course, political class. However, the fact is that they are widely used and this trend will probably continue in view of what is happening in developing economies, although this is not explicitly mentioned. Therefore, we will leave the conclusions to you and will end with an extremely curious table, prepared by Georgi Ganev, Program Director for Economic Research at the Center for Liberal Strategies [6]:
[*] There are different perspectives and approaches to fiscal multipliers. In this article, we will focus only on the most common one in the economic literature - by fiscal multiplier we will understand the change in production in the economy (GDP) caused by the change in government spending.
[1] It was this effect that Finance Minister Chobanov hinted at when he announced that the new EUR 360mn loan, which the government will draw down by the end of 2013, will be drawn from foreign banks, as it is too large for the local market and will result in the withdrawal of free resources for financing the private sector.
[2] OECD Economic Outlook - Chapter 3: The Effectiveness and Scope of Fiscal Stimulus, p. 106
[3] Freedman, C., Kumhof, M., Laxton, D. and Lee Jaewoo (2009). “The Case for Global Fiscal Stimulus”, IMF Staff Position Note, p.5
[4] Spilimbergo, А., Symansky, С. and Schindler, М. (2009). “Fiscal Multipliers”, IMF Staff Position Note, p. 1-15
[5] The two studies are:
1) Muir, D. and Weber, A. (2013). “Fiscal Multipliers in Bulgaria: Low But Still Relevant”, IMF Working Paper, WP/13/49
2) BNB (2013). "Economic Review 2/2013", pages 53-56
[6] The table can be found here - http://www.bma-bg.org/bg/news/bma-fiscal-multipliers
In fact, the only multiplier function of the tax system is the concentration of financial resources for investments where the individual tax subject would not or could not invest in order to trigger such a multiplier effect. An example of this could be infrastructure projects that require decades to build (the time component, not the amount of investment, is important - since a capital investment that does not produce profitability for more than 2-5 years will practically never be made by a private corporation or individual, regardless of the fact that after 50 or 200 years it may produce colossal utility). Another such example is fundamental science - there is NO guaranteed utility, but applied science builds on it. But regardless of these exceptions, let us not forget that such exceptions are single, and therefore a tax system aimed at solving such cases should withhold MINIMUM resources from economically active subjects to redirect them to such projects. Moreover, the human resources required for such a purpose are highly expert and minimal in number. And this is far from the reality...
@Martin Radosvetov
"An example of this could be infrastructure projects that require decades to build (the time component, not the size of the investment, is important – since a capital investment that does not produce a return for more than 2-5 years will practically never be made by a private corporation or individual, regardless of whether it may produce colossal utility after 50 or 200 years)."
Yes, certain investments take decades to build and indeed no private company would build them. However, that is no reason to make them. Typically, the capital required is enormous and businesses correctly determine that it could be put to better use than burying it for decades. There are tons of projects that could potentially be useful (even proven useful), but they are biding their time because there is simply NOT ENOUGH CAPITAL FOR IT. Businesses are guided by what consumers want, and consumers do not want to live worse than before so that, eventually, somewhere in the future, their children can live much better.
In other words: progress is not an end in itself and should not be at the expense of the population. Progress is needed so that people live better, not so that they live worse so that there will be progress somewhere far in the future. The latter was repeatedly used in the former USSR. There, people had a military industry, atomic bombs, space flights, BUT almost no consumer goods. The result of the above: Misery. High mortality. Short life.
"Another such example is fundamental science – there is NO guaranteed usefulness there, but applied science builds on it."
Yes, that's right. However, that's still not a reason to forcefully invest in it. And the investment is forced because business doesn't want to invest in it.
Let me note that fundamental science developed WITHOUT STATE INTERVENTION practically until the 19th century. That is, the development of fundamental science is possible without the state.
@EE
"Let me note that fundamental science developed WITHOUT STATE INTERVENTION practically until the 19th century. That is, the development of fundamental science is possible without the state."
Wasn't fundamental science developed by business until the 19th century? Where was this done and by whom? What do Darwin, Newton, etc. have to do with business?
Name at least one institution with a serious contribution to science that is not supported by a king (state), religious institution, city, etc., and has made a significant breakthrough in fundamental science thanks to the market and private initiative.
@Toto5
You are right to criticize me. I am not well acquainted with some historical facts.
I would give you examples of people like Archimedes, Aristotle, Faraday and others like that.
Note that my claim is NOT that fundamental science cannot develop with state intervention, but that it CAN develop without state intervention, and this has been the case for most of history (which is long! :-) ).
I know about Newton that he was rich, i.e. money was not a problem. However, I know nothing about Darwin. By the way, since a rich man from the past gave money for science (scientists and equipment), this cannot be considered state sponsorship, but rather private.
Nowadays, science needs a lot of capital (money) and sponsorship is necessary. The question is from whom and how?
Certainly, things like CERN, GPS and the like would not exist today if it were not for state intervention. However, this is not a reason to claim that state sponsorship is right. The right question is not: "Is there any result from the money invested?" (CERN and GPS are exactly such results), but "How do we get the greatest result from our investments?". And on this point, the state is out of the question. A huge amount of the money invested by it is wasted. However, this is simply not visible. Have you ever heard someone bragging: "We spent a lot of money and achieved nothing?" You have not and you will not hear it. Unsuccessful projects and those without a useful result are swept under the rug. Only one or two things are visible from state intervention (CERN, the Internet and others), but people incorrectly conclude that it is useful and therefore must exist.
However, as I said, the question is not "Is there any benefit?", but "How much benefit is there?". And the answer to that question is: "There is very little benefit!".
The market would spend the money invested in science much more efficiently. That is, people would receive much more new goods, services, discoveries, and so on, than if the same money were spent by the state. However, the latter cannot be seen because it is an alternative history, i.e. something that could have happened, but did not happen because it was not allowed. Things that did not happen cannot be seen. And accordingly, you cannot compare, because you lack a basis for comparison.
In short: If the state did not tax the population and did not give money for science, then CERN and GPS would not exist (the Internet would exist, however). However, people would live better, and this is the real goal, not just building CERNs and GPS navigation systems and showing off: "Look at what big and expensive toys we have! And from time to time we even get something useful out of them! Ah, if it weren't for the state, they wouldn't exist!".
@EE
For at least 1000 years, the price mechanism has either not been a factor at all or has been secondary not only in fundamental science, but also in education in general. You can find similarities more in institutions like the church, the army, etc. similar, but not in the neighborhood grocery store. Looking for "is there a benefit", "how much benefit is there", etc. for meaningless questions. In the same way, if you look only at the benefit, you will not be able to explain institutions like the Catholic Church, the Inquisition or the Caliphate in the Islamic world. A spontaneous society can create neither fundamental science nor institutions like the church, the universities in Europe or the madrasahs in the East and remain spontaneous.
@Toto5
"For at least 1,000 years, the price mechanism has either not been a factor at all or has been secondary not only in fundamental science, but also in education in general....Looking for "is there a benefit", "how much benefit is there", etc. are meaningless questions."
They are not meaningless questions at all. And the reason is that only in this way can one understand how a system should be built in order to function well. I assume that you do not hold the opinion that for 1000 years and more fundamental science and education have developed as they should?
And the argument that something has existed for 1000 years is not enough reason to say that this is right. Here the church has played an important role in state affairs for probably more than 1000 years. According to your logic, this should be the case until now. And as you know, we live in a secular state.
"Spontaneous society can create neither fundamental science nor institutions like the church, the universities of Europe, or the madrasahs of the East and remain spontaneous."
I don't understand what exactly you mean by "spontaneous society". If you mean "free market" (in the Austrian sense of a minimal state, i.e. non-interference of the state in the economy), then you are wrong. In such a state order, there is no problem at all to create churches, universities and madrasahs (were these the religious schools in the Muslim world?). It will even be much easier than now. And there will probably be thousands of them and all different. Now to create any of the above you need permission. And about the fact that after their creation, society will not be able to remain free: In a free society, you cannot force someone to send their children to a Catholic school. And since they don't go there, they will not have the faith that is needed to be controlled by the priests and the church. A church will only be able to control those people who are with it of their own free will. But how much will they want?
"In the same way, if you look only at the benefits, you will not be able to explain institutions like the Catholic Church, the Inquisition, or the Caliphate in the Islamic world."
There was a benefit from the Catholic Church. The problem is that in my opinion you consider the benefit only as something material. There are also intangible (spiritual) benefits that are of great importance. People needed someone to explain the world to them, to give them guidance and comfort. Accordingly, this is how the church arose.
By the way, if I may ask, are you interested in history? I see that you have an opinion on issues related to it.
Quote:
"Could it be that fundamental science until the 19th century was developed by business? Where did this happen and by whom? Darwin, Newton, etc., what do they have to do with business?"
Please excuse me, but this is absolute ignorance of the subject you are discussing.
And since Archimedes was mentioned, let me start with him. Don't forget that none other than he led the defense of Syracuse. He was practically the head of the Military Complex.
But much more entertaining is Aristotle (teacher of Alexander the Great, i.e. civil servant). What you miss, however, is that he is the creator of modern, cybernetic science.
But let's not stop there.
Since you claim that "business" (a word of English origin) HAS NO NEED FOR FUNDAMENTAL SCIENCE, we can now talk about pure ignorance. If you were my students, I would send you to a remedial exam.
Have you heard the word "merchant fleet"?
Have you ever wondered how a merchant ship is built, for example?
TRADING HAS ALWAYS BEEN EXTREMELY HEAVILY DEPENDENT ON FUNDAMENTAL RESEARCH!
The Phoenicians were the first to learn it. Forget this money nonsense. The Phoenicians had something that was a thousand times more valuable than money: maps of trade routes.
Yes, but these maps were drawn up using quite complex geometric calculations (you haven't forgotten that the Earth is a sphere, and therefore, the shortest possible distance between two points is not a straight line, but an arc - Leibniz-Riemann). But in those times, neither Leibniz nor Riemann had been born.
Have you ever wondered what the most used number system is in the world?
No. It's not decimal, and even less binary. It's sexagesimal. The Sumerians invented it.
You still use a clock, right? And it works in the sexagesimal number system.
Have you ever heard of an "astrolabe"?
Do you know what this device was for merchants in ancient times? Do you think that back then only coastal voyages were made? Have you heard of "navigation"?
So, since I mentioned navigation, what is the connection between GPS systems and the Special Theory of Relativity (STR)? Don't you think that satellites use the same clocks as banks? And do you have any idea how dependent banks are on the position of these same satellites at the moment?
But let's turn to the mathematicians (and other scientists) of the Middle Ages.
Have you heard of "partial differential equations"?
Do you know why they are called "private"?
Because every family of mathematicians has kept them a deep secret. Without these equations there would be no merchant fleets, spices, valuable timber and many other things without which there would be a "shortage of goods and services".
And do you happen to know what a CLOSED LOOP TRIPLE INTEGRAL is used for (studied in IGM)?
Used to CALCULATE BARREL VOLUME.
By 2004, over 50 different spreadsheets were used by commercial and government companies around the world to calculate volumes of various goods. Don't think that everyone uses computers or tablets.
Or should we talk about sine and cosine?
Do you know why cosine phi is such an important quantity for the global economy?
Well, because if you change that, you won't have electricity. And it's high time you learned that electricity is measured in watts (W), and current is measured in amperes (A). They are different quantities.
And if there is no electricity, there will be no cracking process. And if there is no cracking process, there will be no many goodies (like diesel and gasoline, for example). And there will be no electric cars, but they are a pretty fun topic (after all, lithium is a heavy and highly toxic chemical element).
In this vein, do you know what a frequency divider is for?
Well, without it, there would be no world economy, no stock markets, no business models, no economic theories, and other weird things. You would be riding donkeys and camels, and if bandits didn't cut off your heads on the roads, you would be bargaining in some dusty market.
Learn the following fundamental truths:
1. THE CONSUMER HAS THE ONLY RIGHT - TO USE.
2. ONLY WHAT IS ON OFFER CAN BE PURCHASED.
3. THE MOST EXPENSIVE PRICE IS PAID FOR WHAT CANNOT BE BUYED WITH MONEY.
Everything else is empty talk and free interpretation.
I don't remember consumers inventing a computer, a passenger liner, an oil platform, a solar panel, three-component pharmaceuticals, etc.
We can do without economists, and we do very well at it, judging by the profits (remember that TURNOVER IS NOT PURE PROFIT), but I would be very interested if we decided to take away everything you have access to at our pleasure (electricity, running water, transportation, high-tech medicine, pharmacy, chemistry, textile industry, etc.) and leave you to produce your own food.
I wonder if then, in a flash of brilliance, you will tell me about the primary role of one or another macroeconomic factor.
Oh, oh, oh, oh, don't think this is nonsense.
We know what HFT is, but you don't know how the OSI model you use works (and do you know who runs the internet, for example).
Or let's talk about how an inverted bit can turn you from paupers to billionaires and back.
In thousandths of a second, the entire financial system can be brought to a standstill with the click of a button.
Do you believe that the money supply in circulation consists of real money?
Do you know why we don't do it?
Because you are like little children playing in the sandbox. When it's time to take you home, we will bathe you, feed you, and read you a bedtime story. After all, you are our children, and no matter how naughty you are, we love you.
PS The power lies in the one who has a technological advantage. Technological advantage guarantees a high growth rate of return on the initial investment and high profits. Technological advantage without state support is impossible. This is a strategy. Please do not confuse strategy with operational activities. It is different.